To survive and thrive in today’s market, consumer packaged goods (CPG) companies need to shift away from “risk mitigating” innovation approaches to truly unlock and optimize the growth potential of every product they launch. That was the message delivered by Liana Lubel, senior vice president of Nielsen’s Innovation Practice, at Nielsen’s recent Consumer 360 event in Las Vegas.
Lubel started her presentation by citing the huge disparity between what companies expect from innovation and what they actually achieve. Using real-time polling at the start of the session, 66% of attendees echoed this issue, with fewer than half of the new products they launched last year meeting their expectations for growth.
In particular, larger companies with more established, less agile innovation processes struggle to launch winning innovations. Category growth, which occurs when game-changing products attract new buyers to the category or prompt current buyers to accept higher pricing, is a strong indicator of innovation success—and major manufacturers are only driving a small portion of it. In 2015, the top 25 largest food and beverage companies generated only 3% of total category growth, despite accounting for 45% of category sales. In other words, despite maintaining an enormous piece of the pie, these manufacturers can only take credit for $1 billion of the $35 billion in sales from new growth.
Given these numbers, it’s little surprise that CPG companies have accepted incredibly high innovation failure rates as the norm. However, it’s less obvious that this mindset sets off a chain of reactionary behavior which actually helps to perpetuate the problem.
“Because innovation typically yields such low returns, companies have adopted behaviors designed to mitigate the risk of innovation failure,” Lubel said. “Instead of launching bold, category-disrupting innovations, they launch a lot of play-it-safe, ‘me too’ innovations. They use consumer insights as a way to prevent bad innovations from launching rather than as a way to explore ideas and make them better. This behavior only succeeds at mitigating growth, which fuels the perception that innovation is risky.”
In fact, 70% of the respondents in a recent Nielsen client survey said their company is more interested in mitigating risks when it comes to launching new products than finding a breakthrough innovation.
To increase innovation success rates and achieve more growth, Lubel said companies have to fundamentally transform the way they innovate by focusing on four key principles. First, instead of fitting their innovation processes to their current technical capabilities, they have to prioritize solving real consumer struggles. “This seems simple enough, but 75% of concepts tested by Nielsen don’t fundamentally address any relevant need for consumers,” she said.
Second, companies need to shift their mindset around consumer analytics; this information should be used primarily for maximizing growth, not mitigating risk. “In the old days, you did a concept test as a way to get a green light on development and to prevent bad ideas from launching. But Silicon Valley has taught us a new way of doing things where we start from a hypothesis and, through rapid prototyping and testing, build to a whole idea that’s the strongest it can be.”
Third, companies need to create an innovation process to fit the innovation, not vice versa. This means accepting that some innovations are designed only to sustain growth—and some are designed to break through—and they both need to be managed differently. To highlight this point, Lubel cited Dole’s Chopped Salad kits, which was one of 18 2016 U.S. Breakthrough Innovation Award winners. She called out Dole because the company had to change its manufacturing and package procurement processes to deliver the restaurant-quality experience it wanted for the new salad kits brand—even though it meant spending a considerable amount of money.
Finally, companies need to treat in-market execution as a priority rather than an afterthought. Lubel cited data showing that brands who spend 94% of their year one ad dollars in year two continue to grow into their second year. Comparatively, she noted that brands that only spend 21% of their year one ad dollars in year two tend to decline.
Lubel isn’t alone in the way she thinks about innovation. She was joined during the session by Covahne Michaels and Jessica Peralto, both directors from the J.M. Smucker Co., and Emily Silver, VP of marketing in charge of portfolio transforming at PepsiCo. Peralto echoed Lubel’s advice and described the transformation experienced by the Smucker’s Big Heart Pet brand, which evolved from launching products that delivered 1% growth to launching products that delivered 14% growth.
“Anchoring all of our success was as a shift in culture. We had to create an environment where calculated risk could be taken—a process we call Disciplined Entrepreneurship. This was spearheaded from the top down,” Peralto said.
PepsiCo’s Silver described some of the internal pressures and challenges her team faced when launching the Mountain Dew Kick start brand. At first, she said some were skeptical of success, but by leveraging consumer analytics and forecasting data, the team was able to build a strong business case to keep the initiative from getting sidelined for being “too risky.” In fact, Silver said the team was able to convince internal stakeholders to double down and spend more on advertising and line extensions because the data pointed to a big idea.
“Like everyone, it’s easy to launch and move onto the next bright, shiny object, but you end up leaving so much money on the table. That’s one of the big takeaways for us from this launch: keep the focus and sustain the effort,” Silver said.